insight magazine

Next-Gen Transitions: Building a Firm That Lasts

The inevitable outcome of building a successful CPA firm is handing the reins to the next leader. Three experts share their insights into making that transition a success. By Annie Mueller | Winter 2021

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Change is difficult, even when it’s desired. In fact, change in the workplace can be more challenging than major traumatic life events like bereavement and divorce, according to research from Development Dimensions International Inc. And transitioning leadership to the next generation is a huge change looming on the horizon of every successful CPA firm.

Yet, research from the Exit Planning Institute shows that most firm owners have very little, if any, transition planning in place. “Firm leaders need to recognize the inevitable and acknowledge they have a responsibility to their stakeholders,” says Dan McMahon, CPA, founder and managing partner of Integrated Growth Advisors.

According to Pew Research, baby boomers have stayed in the workforce longer than prior generations, but that time is ending. “The pandemic caused many senior partners to accelerate their thinking in terms of transition,” says Dr. Mark L. Frigo, CPA, distinguished professor emeritus, founder of the Center for Strategy, Execution, and Valuation in the Kellstadt Graduate School of Business at DePaul University, and lead instructor in the Illinois CPA Society’s Strategy Academy. So, while the struggles of transition to the next generation are perennial, a high number of firms are building their transition plans right now—and those that aren’t should be. Because the only thing as important as building a successful firm is building one with sustainable value for the next generation of leadership.

Transition Means Letting Go

While everyone in the firm plays a part in a successful transition, the retiring partner must take the lead. But even when eager to release the demands of firm ownership, exiting partners often struggle to let go. “In our industry, partners may retire on paper and even give up their equity, but keep working and continue to own the relationships with clients. The firm isn’t really transitioning,” explains Kristen Rampe, CPA, managing principal at Rampe Consulting.

For a partner who’s struggling to really step back, framing the transition as a leadership responsibility may help. “Partners have an obligation to their clients and the people who have worked with them for many years,” McMahon says. “Without a solid transition, you’re leaving them at risk.”

“The biggest risk for retiring partners is to do nothing, which can negatively impact the firm and all of its stakeholders,” Frigo stresses.

To kick off a successful next-gen transition, exiting partners should start here:

Implement a timeline. “If the firm wants to move forward successfully, it needs a timeline,” Rampe says, which should include determining the firm’s value, choosing partner candidates, setting readiness standards, implementing a trial period, finalizing the new partner agreement, and transferring client relationships.

Be aware of generational differences. “Recognize that there will be differences in mindsets between the current leaders and the new generation of leadership,” McMahon says. Find common ground and set objective standards so exiting partners can trust new ones to take over operations and valued client relationships.

Be open to change. “The major barrier to transition success for a firm is often resistance to flexibility and change,” Frigo notes. “In addition to generational gaps and new standards of employee engagement, client needs have changed.” Exiting partners must accept that incoming leaders may be better at spotting new opportunities and may prioritize different business strategies.

Clarify the vision. “From a leadership perspective, exiting partners must have a vision and be able to articulate that vision to the people that follow them,” McMahon explains. This clear, articulated vision can be transferred to incoming leadership, giving the firm strategic continuity throughout the transition.

Guided by Governance

If the vision is the starting point, firm governance is how you accomplish that vision even as leadership changes and team members juggle multiple priorities. “It’s extremely important to still be able to pursue a sales opportunity or a potential new client, because that’s how the firm sustains itself,” McMahon explains. “At the same time, you’ve got to keep your existing clients satisfied, even in the midst of a leadership transition.” A defined vision translated into good governance keeps everyone in the firm aligned and functioning through external and internal change. “The intergenerational transfer of ownership within the accounting profession is very much at the core of why governance matters,” McMahon says. He notes that steady firm governance is built on these three principles:

Clearly outlined roles and responsibilities. Even in the flurry of a next-gen transition, keeping up with the work that made the firm successful in the first place is a must. A clear delineation of responsibilities makes this possible. “The staff should focus on serving clients and getting their work done, while managers and partners need to juggle multiple tasks,” McMahon explains. “The firm’s leaders must build a team they can delegate tasks to; a big part of leadership is developing the people around you.”

Clearly communicated policies and procedures. “Design sound policies and procedures around quality control, efficient processes, and human resources-related matters,” McMahon advises. These will keep things running smoothly even in the busiest of times.

Foregrounded goals and metrics. Everyone in a firm, including partners, managers, and staff, should know exactly what they need to do to maintain and build on the firm’s success. “Be clear about what’s important to the firm and what the firm needs,” Rampe says. “Spell it out.”

Strategic Valuation

Timely firm valuation is necessary for two reasons: to determine the exiting partner’s buyout and to measure steps the firm is taking to grow its value. Governance makes the former possible, as financials tell only part of the story. Defined roles, responsibilities, and clear metrics fill in the blanks, from putting a number on intangible assets to identifying shortfalls. “There are value gaps between what a firm could be and what it actually is,” McMahon explains. “These are areas of risk which could directly impact the firm’s valuation.”

Many firms start and stop there, with a single valuation process at the time of transition. “While accounting firms may do valuations for their clients, they don’t actually value themselves very often,” Frigo says. “They need to develop and describe a firm strategy to create greater value for their clients as well as for their stakeholders, their partners, their staff, and the firm as a whole.” An ongoing, strategic approach to valuation provides more insight and opportunities for growth. It’s an intense but important undertaking. “The value of your firm is more than just a theoretical price tag. It’s the single most important indicator of your success as a collective team of partners,” McMahon says.

Here’s how to get started with strategic valuation:

Use a framework. “I recommend that CPA firms apply a strategic valuation approach to their clients in order to understand their present and future needs and also concomitantly apply it to themselves as a CPA firm,” Frigo says.

Identify value gaps. “For leadership getting the next generation ready to take over, transparency is important,” McMahon explains. “Be transparent about how the firm operates, how it executes, and what its strengths and weaknesses are.”

Understand your intangible assets. “There are three intangible assets every accounting firm should analyze: the managerial assets and skills of its people, the knowledge-building capacity of its culture, and its ability to adapt,” Frigo says.

Focus on the right clients. “Some clients don’t create value,” Frigo explains. “Rate clients on a one to 10 scale, with 10 being ‘They highly value the unique services we provide,’ then focus on the clients who rate an eight or higher. Figure out how to create more value for those clients.”

Prioritize offerings. “Look at the portfolio of services you offer to clients and analyze how valuable those are,” Frigo says. “Commoditized offers are always a risk; focus on expanding offers that are more innovative.”

Do more outsourcing. “Many CPA firms outsource not just accounting and tax services, but also services relating to valuation, investor information memorandum, financial due diligence, audit support, and M&A support work. These are premium value-creating services,” Frigo explains.

Develop strategic partnerships. “One of the biggest opportunities is to differentiate between what the firm should continue to do internally and what it should start doing externally,” Frigo notes. “Strategic partnering can provide quality at the same level while being effective, efficient, and capable. It’s the need of the hour for many CPA firms.”

Relationships and Readiness

Strategic valuation will determine how the firm can grow as a sustainable and transferable firm: which clients to serve, which services to prioritize, and which opportunities to pursue. Then it’s about identifying and developing the right people to pursue those opportunities. “A CPA firm competes for clients based on the quality and capabilities of its people,” McMahon says.

For a successful next-gen transition, consider the right fit for new leadership based on emerging opportunities and what current staff and managers need from a firm leader. “Blind spots in this area can cause a lot of damage,” Rampe warns. “If you bring in someone without the right leadership skills, or who is great at client work but disinterested in strategy, you get partners who are dissatisfied because the new person is not pulling their weight.”

To avoid a mismatch, set clear criteria for an incoming partner. Here are Rampe’s recommendations:

Have a solid client base. “A partner should have a sizable amount of client work or soon be able to develop it and have the ability to source their own business.”

Show business development sense. “Aptitude and achievement are good; with new partners, showing promise can be sufficient.”

Demonstrate leadership skills. “You need someone to do the necessary work of leading a firm: setting strategy and goals, holding partners accountable, and holding himself or herself accountable to take on the initiatives that the firm needs.”

Be a team player. “Do you need someone who is really good sitting in their office with the door closed, or someone who is an influencer, with morale- and culture-building expertise?”

Fit in the firm. “Maybe the firm has plenty of work and people in place to develop more. In that case, a partner who excels in client work but doesn’t need to bring in business could be the right fit for the firm.”

From Trial to Transition

The retiring partner bears the most responsibility for a successful transition, but incoming partners also need to step up. “What should be happening in parallel is the new partner asking questions and making decisions,” Rampe says. “They should examine the kind of firm it is, the governing rules, the clients, and the standards. Sometimes there are factors they need to work through.”

As McMahon points out, incoming partners often know their own strengths and skills better than anyone and should examine and articulate what they can offer to lead the firm into the future. “As a next-generation partner, you have many opportunities to demonstrate leadership skills,” McMahon says. “If you can see that there’s a hole, step up and fill that gap.”

Once the right person is found, transition forward with these steps:

Set up a trial period. “Our standard recommendation is a one-year period as a non-equity partner,” Rampe says. “It gives everyone time to adjust and make sure nothing goes awry with the full transition.”

Set up managers and staff for success. “How skilled is the management team within the accounting firm? The team may have skill gaps to fill,” Frigo notes. Identify and discuss gaps and opportunities with both managers and the incoming partner, updating roles and responsibilities as needed.

Graciously hand off client relationships. “The relationship transfer needs to happen,” Rampe confirms. “Figure out what that timeline is for moving on.”

For partners who’ve built thriving firms that they’re immensely proud of, handing the reins to the next leader can be challenging but ultimately deeply satisfying. “Firms that are committed to building a sustainable and transferable business sometimes find it overwhelming,” McMahon notes. “But those who succeed not only achieve higher performance, but they also increase the valuation of their firms for both the current leadership and the next generation of partners.” After all, a partner who pulls off a successful next-gen transition has created a legacy that may continue for decades to come.

Annie Mueller is a Puerto Rico-based financial writer and a frequent contributor to various industry publications.

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